Sonic hedgehog (Shh) signaling plays a crucial role in human development with inappropriate pathway activity associated with a variety of human birth defects and up to 25% of human cancers including cutaneous basal cell carcinomas (BCCs). Our unifying hypothesis supported by data gathered in the previous round of funding is that cell-intrinsic Shh target gene induction in BCC epithelium is regulated by specific signals from the surrounding stromal cells. We have focused on identifying both the tumor cell-intrinsic (TFs) and the non-cell autonomous stromal factors (SFs) that affect Shh target gene induction and tumor function. Our results point to three cell-intrinsic mechanisms that regulate Shh target gene induction in the epithelium: 1) regulation of Gli transcription, 2) regulation of Gli protein destruction, and 3) regulation of Gli activity through accessory transcription factors such as Missing in Metastasis. We have demonstrated that tumor formation depends on epithelial Gli protein accumulation. Gli is destroyed in a proteasome-dependent manner through two distinct, conserved destruction signals Dn and DC. Removal of these degrons stabilizes Gli1 and rapidly accelerates BCC formation in mice. Separate studies using a novel assay for stromal activity have identified SF1 as the BMP antagonist gremlin that is capable of maintaining epithelial Shh responsiveness in the absence of stroma. Gremlin is expressed in a small subset of cells normally and in cells surrounding BCCs, and induces GN2 transcription, thus establishing a mechanistic link between tumor and stromal activity. The focus of the current renewal is to understand, using human and mouse tissue models we have developed, how cell-intrinsic step 2 and the newly identified SF1, gremlin, maintain Shh target gene induction and tumor growth. We will: 1) Elucidate the mechanism of Gli protein destruction by defining the contribution of each degron to BCC development, establish the impact of stabilized Gli on tumor development, and identify the signaling pathways that regulate Gli destruction;2) Define the mechanism of gremlin-dependent stromal activity by elucidating the mechanism of gremlin-mediated potentiation of Shh signaling, and establishing a tissue role for gremlin in human and mouse BCC development. This effort is based on the premise that understanding Shh- dependent tumor-stroma interactions in the skin will lead to new insights into tumorigenesis, with a goal toward new therapeutics for human birth defects and epithelial tumors.